Author: Li Daxiao, Director of Yingda Securities Research Institute.

Recently, the A-share market showed a trend of first suppressing and then retreating during the period of testing the high point of the Shanghai Stock Index in 2018. The Shanghai Stock Index successfully reached 3,600 points and hit a new high in the past six years. The bear market adjustment trend may be successfully reversed on a technical level, and the bull market development trend since the Shanghai Stock Index reached 2,440 points in early 2019 is expected to continue.

In fact, after the market rise in 2019 and 2020, some A-share stocks have accumulated relatively high gains, especially high-valued growth varieties continue to gain favor from the market.

However, it is difficult for these varieties to push the market as a whole out of the bear market cycle. Social wealth still mostly regards the stock market as a place for speculation, rather than an important allocation asset for the long-term investment of most stable capital.

In contrast, the blue-chip sector of the stock market is, after all, a large-capitalization species, which has a stronger ability to absorb wealth and has the ability to provide investors with long-term stable returns. Therefore, from a longer-term perspective, A-shares' short-term surge to 3,600 points is of limited significance, while blue-chip stocks regaining the main force in the market is conducive to the continued stability and improvement of A-shares.

Of course, the strength of our blue chips this time is not simply driven by the Spring Festival market capital, but more of the restoration of their value and the upward trend.

1

The macroeconomic situation continues to improve and is optimistic

In 2020, growth stocks in global stock markets performed well. On the one hand, they benefited from the rapid growth of emerging industries. Growth levels, on the other hand, also benefited from the extremely loose monetary policies of the monetary authorities of major economies around the world.

In the context of the lack of social capital investment projects, the focus is on emerging industries; while traditional industries are affected by the macro environment and their performance has declined, so naturally their market performance is relatively limited.

Due to the better control of the domestic epidemic, the domestic macroeconomic growth rate turned positive in the third quarter of 2020, and the recovery situation is ahead of other major economies in the world. Recently, the National Bureau of Statistics released price data for December 2020. The CPI index showed a slight seasonal rebound, the PPI index continued to trend upward, and the corporate production and social demand situation continued to improve.

Therefore, it can be expected that from the fourth quarter of 2020 to the first quarter of 2021, macroeconomic growth will still pick up, which will be conducive to the improvement of the performance of some traditional industries and the repair of their market valuations.

2

The valuation of blue chip stocks is low

Although the A-share market has continued to rebound in the past two years, the overall valuation level of blue chip stocks is still low. The price-to-earnings ratio and price-to-book ratio of the Shanghai Composite 50 Index, which reached a new high in 13 years, were 15 times and 1.62 times respectively; the price-to-earnings ratio and price-to-book ratio of the CSI 300 Index, which was close to the high point in 2007, were 17.2 times and 1.87 times respectively.

In comparison, the price-to-earnings ratios of the US Dow Jones Index and the S&P 500 Index are 30.3 times and 37.4 times respectively, and the price-to-book ratios are 6.54 times and 4.16 times respectively. Obviously, the A-share blue chip sector is more attractive for investment.

3

The RMB exchange rate continues to strengthen

Benefiting from the rapid recovery of the domestic economy, better import and export situation, and risk-free interest rates higher than those in the international financial market , the RMB exchange rate against the US dollar has continued to strengthen since mid-2020, with an increase of more than 7 in half a year. Along with the strength of the RMB, the willingness of foreign capital to enter the market has also continued to increase, and the scale of northbound funds entering the market has increased significantly at the beginning of this year.

Of course, compared with mature international financial markets, the proportion of foreign capital in A-shares is still relatively low.

At present, the proportion of northbound capital holdings in the total A-share market value is only 2.89, while in international mature financial markets this ratio is more than 20. Therefore, against the background of the popularity of RMB assets, foreign holdings of A-shares The proportion of shares will continue to increase.

According to the main investment preferences of foreign investors in other financial markets, stable and profitable blue chips are still their main investment targets.

4

Residents’ savings enter the market through public funds

Following the substantial growth in sales of partial equity public funds in 2020, in the first seven working days of January 2021 , the issuance scale of public funds reached 126.819 billion, and there were 18 newly issued funds, including 1 stock fund, 13 hybrid funds, and 4 bond funds.

The average number of issued shares per fund is approximately 7.046 billion, which is the highest since October 2007. The boom in fund sales is evident.

We believe that the entry of residents’ savings into the market through public funds is just the beginning. The process of adjusting the allocation of social wealth among major asset classes will continue. This scale cannot be fully undertaken by small and medium-sized high-growth varieties. , large-cap blue-chip stocks with low valuations are still expected to become the allocation choice of institutions.

5

Economic policies have shifted from strong stimulus to stable growth

In 2020, the world has experienced a rare impact of the epidemic. In order to hedge against the negative impact of the epidemic, countries have taken many economic measures. stimulus measures. However, economic stimulus is not the norm for development. As the domestic epidemic prevention and control situation improves and the macro economy continues to recover, it is expected that strong stimulus measures on the policy side will be transformed into measures to stabilize growth.

How high-growth varieties that benefit from favorable policies can maintain better growth and market competitiveness in the context of reduced policy support will be an important test process for testing the quality of their high valuations.

On the other hand, growth stocks benefit from low interest rate policies, and the capital-driven trends in stock prices often require positive policy catalysts. If the intensity and frequency of positive policy announcements in the later period are lower than expected, then high valuations will sustainability will also be tested.

It can be expected that when policies stabilize, more market forces will be used to test the performance of high-valued growth stocks, and some high-valued stocks without performance support will have to face the change of A-share style. Adjust the pressure.

6

With the introduction of vaccines, the epidemic will be further controlled

At present, domestic vaccines have been launched. Although there are setbacks in short-term epidemic prevention and control, epidemic prevention and fighting The steps are still solid. Due to the experience of successfully preventing and controlling the epidemic in Wuhan and the high awareness of epidemic prevention among the domestic people, the probability of controlling the scattered epidemic is relatively high.

It is expected that with the steady advancement of the vaccination process, the domestic epidemic prevention and control situation is expected to further improve, and short-term epidemic twists and turns will not affect the macroeconomic recovery process.

7

Large or small non-reduction pressures force a change in style

As A-shares continue to develop for the better, especially the sharp rise in high-valued varieties, The willingness of non-shareholders, large and small, to reduce their holdings has increased significantly. In 2020, the net reduction of non-shareholdings of A-shares in Shanghai and Shenzhen stock markets reached 692 billion yuan, while in 2019 this indicator was 357.3 billion yuan, an increase of 93.67.

The willingness of non-shareholders to reduce holdings of high-valued varieties is significantly higher than that of low-valued varieties, which will inevitably suppress the upward trend of high valuations in the market; while low-valued varieties often see shareholders increase their holdings and go public The phenomenon of corporate buybacks will also prompt market funds to flow to undervalued blue-chip varieties.

8

Stock market policy dividends are still expected

The registration-based reform has been successfully implemented on the Shanghai Science and Technology Innovation Board and the Shenzhen Stock Exchange GEM, and will be promoted to the entire market in the future The probability is relatively high, and the institutional dividends of the reform are expected to benefit other sectors of the market. According to the experience of mature markets, innovation in financial markets often starts with stable and large-capitalization products. Undervalued blue-chip stocks are expected to benefit more from the institutional dividends of the stock market.

In addition, new delisting regulations are about to be implemented, and some high-valued products with poor performance face certain risks of delisting, which will also affect investors' enthusiasm for investing in high-valued products.

Overall, the emergence of blue-chip stocks as the main bull market is an important stage in the development of the A-share bull market, and will also be conducive to the continued advancement of the marketization, internationalization, and standardization process of A-shares. Ordinary investors need to pay attention to this market development characteristic and be wary of the market risks of overvalued and underperforming varieties.